Planning for the future is never easy, but it can seem even more complicated when thinking about your business’s future. When it comes to transitions, you need insurance agency support on all sides.

One critical support area is agency accounting. The dollars and cents of your agency’s sale, internal or external perpetuation, or your acquisition of another agency are integral. To get perspective on the issues surrounding agency transitions, we reached out to our partners at the accounting firm Donovan, Sullivan, and Ryan (DSR).

We talked with Chris Ryan, CPA, MST and Partner, and Michael B. Ryan, CPA and Partner at DSR. Chris, who spoke with us before about the best accounting software for agents, specializes in insurance agencies, professional services firms, and family-owned businesses. His uncle, Mike, specializes in services to insurance agencies, especially in mergers, acquisitions, and valuations.

Many owners want to pass their agency to a family member or employee. What are the benefits and disadvantages of internal perpetuation?

Chris:  Our firm, DSR, has a specialty with insurance agencies, and we have many agency clients. I spend a lot of time speaking with agency owners about what’s on their minds and helping them navigate different situations like agency perpetuation.

Often, business and customer base retention are higher during an internal perpetuation. To the seller, that may feel like a more meaningful deal, and retaining both customer base and business is advantageous. However, with internal perpetuation the sales price is usually lower than an outside buyer deal. It’s about weighing options. I talk with owners about what they value and help them decide what feels right for their agency.

What are some common issues you see among agencies wishing to perpetuate internally? How do you work through these issues with your clients?

Mike: Internal buyouts are complicated because of agency values. To make it work, the seller must be flexible and often willing to accept a below-market deal. That can be tough for some, so owners who want to sell internally should prepare for that reality.

Chris:  When the seller and buyer are related, tax implications are more complex. That can affect the seller’s timeline, extending it farther than anticipated. We work with each party independently to discuss issues and reach a conclusion and timeline that works best for everyone. We discuss the matters with the client and provide tax projections to show the amounts involved and how they would change with the tax impact.

Another issue can be a mismatch between the seller and their intended successor. We encourage clients to only sell to a successor who is interested in buying. If no one has a genuine interest, it’s best for all parties to look to an external buyer.

Shifting to owners looking to acquire or merge with an agency, what advice do you give to them?

Chris:  With a merger, agency culture and personalities need to be similar. In an acquisition, similar cultures are important, but other factors should be carefully considered, like customer base and retention and agency location.

Mike: Buyers should develop finance sources ahead of time so, when an opportunity presents itself, they can move quickly. Other buyers can be aggressive, so the faster an agency can act on a potential acquisition, the better. We suggest clients work with bankers who understand insurance agencies and are comfortable lending based on projected cash flow rather than collateral.

What are some common issues facing your insurance clients around mergers and acquisitions? How do you help them through these issues?

Mike: Some of the most common issues include personnel, valuation, and sale structure.

Sellers need employment contracts, or anti-piracy agreements, in place for all staff. Otherwise, buyers can require them before completing an acquisition. This can present serious problems if employees do not cooperate or decide to leave due to a sale.

Some sellers have unrealistic expectations of their agency’s value. We explain what drives agency market values and provide reasonable estimates of an agency’s sales value. This conversation helps sellers have realistic expectations in terms of sale structure, including payments and continued involvement after the sale.

What are steps agencies can take to avoid common problems?

Mike: Agencies should begin planning for a sale well in advance of their desired sales date. Planning ahead gives time to get everything in place for a sale, like financial and agency historical information, employment contracts/agreements, and an agency sales appraisal. The sooner they start planning, the better we’ll be prepared when a sales opportunity presents itself.

Chris: It’s important to start planning a few years ahead of time and to organize accounting records and general agency financial operations. Having everything in order ensures proper valuation.

What would the ideal client interaction look like when it comes to planning for the future?

Mike: We start with a review of the agency owner’s perpetuation goals. Are they looking for the highest or fastest payout? Do they want the agency to continue independently, or do they want to stay active in the agency? Once the goals are established, we can discuss the specifics of how to accomplish them. Ideally, the client has thought about these questions before and has a good idea of what they want when they come to us.

What is one final piece of advice you’d give to all owners around planning for their future?

Chris: Think about how to add value now. Look to grow in areas where home values are high, or there is projected growth for future customers. Diversify your assets; identify various target areas, and work to grow each. Thinking ahead and diversifying will help you bring up your present and future value, making you more attractive to sell, merge, or acquire when you’re ready. The higher your value, the higher your profit share, helping you build your future beyond your agency.

Mike: Explore all options for your agency’s future and keep re-evaluating as you grow. Don’t get locked into just one approach and allow yourself to change course over the years. Plan as far ahead as you can and allow for adjustments. Looking for more advice on how to plan for your agency’s future? Check out our blog for posts on agency perpetuation and getting your accounting in order as you prepare for the future.